Economic Update - February 2026

January delivered a mixed yet broadly resilient start to 2026. Australian equities outperformed global peers, commodities surged, and early signs of economic re‑acceleration began to appear domestically. However, sticky inflation, higher yields, and geopolitical tensions kept markets cautious.

Market Overview 

Australian Equities Lead Global Peers

The S&P/ASX 200 rose 1.8%, supported by strong commodity prices, while small caps outperformed with a 2.7% gain. Energy and Materials were the clear standouts, while Tech and REITs lagged.

Inflation surprised higher at 3.8%, reviving concerns about further RBA tightening.

Global Equities Mixed

Developed markets dipped, with the MSCI World (AUD) down 2.7%, while the S&P 500 rose 1.4%.

Geopolitics (Venezuela, Iran) added volatility, while Japan’s Nikkei 225 jumped 5.9% on fiscal stimulus and an election announcement.

Emerging Markets Outperform

Emerging markets rose 3.6%, with China’s CSI 300 up 1.7% amid ongoing tech rotation despite softer economic indicators.

Fixed Income – Higher Yields, Mixed Returns

 Bond yields moved higher:

• U.S. 10yr: +16 bps,

• Australia 10yr: +7 bps,

• Japan 10yr: +17 bps.

Sticky global inflation kept central banks cautious, and volatility resurfaced at the long end of yield curves.

Sector Performance: Positives & Pressure Points

Energy (+10.6%) – The Month’s Strongest Performer

• Drivers: Oil rose 13.6% due to geopolitical tension and supply disruptions. 

• Risks: Ongoing geopolitical instability and supply sensitivity.

Materials (+9.5%) – Supported by Surging Commodities

• Drivers: Uranium equities soared (Deep Yellow +54%, Paladin +44%) on higher spot prices Gold reached record highs; copper up 4.9%.

• Risks: China’s PMI dipped below 50, signaling weak demand. Earnings remain heavily price‑driven and volatile.

Defensive Sectors – Health Care, Staples, Utilities

Modest gains of +2.2%, +2.0%, +0.6% respectively. Supported by a rotation to quality and stable domestic demand but facing lingering cost pressures.

Technology (‑9.4%) – The Biggest Drag

Drivers: Rising yields and concerns about AI‑related capital efficiency. Company‑specific setbacks (e.g., Silex failing to secure US$900m funding).

Real Estate (A‑REITs ‑2.7%) – Weighted by Rates

Higher yields and an upside inflation surprise pressured valuations. Global property, however, outperformed (+2.8%).

Fixed Income – Better Yields, Choppier Prices

Australian bonds remain relatively attractive versus global peers when hedged. However, U.S. inflation uncertainty and looser fiscal positions abroad keep long‑end volatility elevated.

Key Factors Driving Markets

1. Strong Rebound in Commodities: Oil, gold, uranium, and copper all rose sharply, supporting Australia’s resource‑heavy index. 

2. Inflation Surprises & Rate Expectations: Australia’s higher‑than‑expected CPI and sticky U.S. inflation reinforced a cautious central‑bank stance. The RBA lifted the cash rate to 3.85%, its first hike in two years.

3. Geopolitical Tension: U.S.–Venezuela conflict, Iran unrest, and energy supply concerns drove commodity volatility.

4. Narrow Earnings Recovery: Australian earnings upgrades were mostly confined to Resources, while seven of eleven sectors experienced downgrades.

5. Domestic Economic Reacceleration: Australia’s economy is moving back toward trend growth (~2.1%), supported by population growth, resilient services, and recovering real incomes.

Market Outlook – What Investors Should Watch

1. Inflation Trajectory & Central Bank Policy: Inflation remains the key swing factor for equities, bonds, and property. Both the RBA and Fed are cautious, and markets expect data‑dependent moves.

2. Breadth of Australian Corporate Earnings: A durable earnings recovery requires contributions from non‑Resources sectors. For now, the upswing remains narrow and price‑driven.

3. Domestic Demand & Capex Cycle: Non‑mining capex is rising sharply, with impacts expected through 2026–27—potentially strengthening earnings if demand holds.

4. Global Volatility and Geopolitics: Energy markets and investor sentiment remain sensitive to geopolitical developments.

The Bottom Line for Investors

• January showed resilience amid uncertainty, with Australia outperforming thanks to commodities.

• Inflation, geopolitical tensions, and central‑bank caution continue to shape the investment landscape.

• A broader earnings recovery will be critical for sustained equity gains.

• Positioning remains balanced: opportunities exist—but so do risks tied to inflation and global instability.

If you have any queries with what this means for you, please don't hesitate to contact us.

Thanks to our research partners at Lonsec for assisting with the preparation of this Economic Update.